Save This Column and Don't Use It Until the Market Crashes / Also, where one contrarian is putting his money

Herb Greenberg

Published 4:00 am, Thursday, April 27, 1995

At some point -- in three months, three years or maybe in the next three decades -- the market will have a few unpleasant days. They'll scare the logic (not to mention the daylights) out of individual investors. What are the 13 promises you should make today to avoid costly mistakes later -- promises you should put in an envelope marked "to be opened only in the event of a crash"?

I posed the question to several market pros, beginning with Kurt Brouwer of the San Francisco investment firm of Brouwer & Janachowski, which specializes in mutual funds. "Some are a bit repetitive," he says, "but this stuff is quite simple. Simple in concept, hard in execution."

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-- When the stock market is at its worst, I buy or I hold, but I do not sell.

-- I am a long-term investor and I know the stock market always comes back. I will sleep secure knowing history is on my side.

-- If the stock market posts a 30 percent loss or greater, I will move into more aggressive stock funds, such as small- company, growth and aggressive growth funds. Warren Buffett made a fortune and built his reputation buying GEICO and the Washington Post Co. during the stock market lows of 1973-74. I cannot wait for the chance to do the same thing. Even if stocks fall further, I will stay cool, calm and confident.

-- When stocks start back up, I will hold or buy even more. I will not sell (Warren Buffett still owns GEICO and Washington Post today). Waiting to get back to even is bogus, and I will not fall for it. Nor will I take short-term gains. I am going for big, long-term winners.

-- I will not read, listen to or believe negative stories during the crash. I know things are never as good as they seem when you're winning, and never as bad as they seem when you're losing. The blessed media will probably be uniformly negative if we have a real barn burner of a crash.

-- I will not change my investment objectives while the stock market is down. Nor will I become a "safety first" investor under emotional duress so that I decide to sell stock funds and buy money market funds. I will either maintain the same asset mix or consider adding to the stock funds.

Market veteran Robert Stovall of Stovall/Twenty-First Advisers, who is known for his common sense wisdom:

-- Since 1926 common stocks have risen an average of 10 percent a year.

Since 1982, they've risen 15 percent a year. So just remember -- if I have one or two bad years, it will be made up in time.

-- I will remember to sell high and buy low. If the market crashes, I will move money from cash equivalents (Treasuries, etc.) into stocks with every 50-point drop in the Dow or five-point drop in the S&P 500. (Do the reverse when the market hits new record highs.)

-- I will read "Stocks for the Long Run" by Jeremy J. Siegel. It shows the record of stocks back to 1805 and explains why it's dangerous not to be in stocks.

-- I won't worry that stock prices could go lower. When everyone is scared and the market has just had that big crash, I will buy as much as I can because people who are afraid and procrastinate -- and who are looking for a bottom -- tend to miss the bottom and then don't get back in, i.e., ignore the words, "Waiting for a clearer picture."

-- I will make sure anything I buy was hit by the decline. In other words, I won't buy anything that didn't go down, because it probably won't go up. I want to use a big market break to buy quality stocks cheaply.

-- I will make a note to myself to not look at all the stocks I bought for a good three years. After a big break like that, the standard thing people do is buy stocks and hold them for six months to a year. They forget that a big break is usually a precursor to a big bull market.

-- Finally, I will remember that every big break generates a new generation of gloom and doomers. I will ignore them, because if they didn't forecast the crash, they're not good forecasters.

CONTRARIAN CORNER

With stock prices as high as they are, one-fourth of the Robertson Stephens Contrarian Fund's portfolio has been sold short -- its legal limit for the bearish practice of betting that stocks will fall. "People have become complacent that the market is safe," says fund manager Paul Stephens. "Mutual fund investors are now convinced that equity investing is safe, and that it's possible not to lose 40 to 50 percent of their money in mutual funds."

Stephens says that's as naive as when people 10 or 15 years ago thought they they couldn't lose money as long as they invested in good real estate.

Where's the next big boom? Stephens' passion for gold is well known, but it has been extended to such commodities as oil and gas, copper and nickel, which he thinks will benefit from the growing world economy. It reminds him of 1982, just before the bull market started, when he felt the stocks were "dirt cheap, and nobody cared. I'm just as positive right now that in the next several years there'll be a change in leadership to commodity-based securities. But everyone think's that's dumb right now."

Sooner or later, we'll see who was dumb.

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